Thursday, December 18, 2008

College Scholarships 2.0

Someone has come up with a pretty good idea that could revolutionize the way some people pay for college: Human capital contracts. This idea was profiled recently by Boston Globe reporter Rebecca Tuhus-Dubrow:

In 1997, David Bowie applied his well-known penchant for experimentation to finance: He offered to sell shares of his albums' future revenues. If you had faith in the enduring popularity of Ziggy Stardust and Space Oddity, you could purchase Bowie Bonds and receive a percentage of the royalties for 10 years. In return, the aging rock star got an immediate infusion of cash.

When Miguel Palacios, a young Colombian financial analyst, heard the news of this arrangement, he had an epiphany. As a college student, he'd witnessed classmates reluctantly drop out of school because they couldn't afford to continue. Had they been able to offer their own version of Bowie Bonds, perhaps they could have earned their degrees.

"If he could do it," Mr. Palacios thought, "why couldn't all those bright, talented students do it as well?"Other thinkers have begun to ask the same basic question. The result is an innovative way to think about paying for higher education. The idea, sometimes called human capital contracts, is that investors agree to cover the costs of college or graduate school in return for a percentage of the students' future earnings over a fixed period of time. Since payments are scaled to wages, the odds of default – and of financial hardship for the graduate – are greatly reduced. This scheme transfers much of the risk from students to investors. But if the students earn handsomely, the investors stand to gain more than they would under a traditional loan.

Over the last few years, several companies have begun brokering these agreements in Europe and Latin America. One of these, Lumni, which Mr. Palacios co-founded, is laying the groundwork for operations in the United States, and its first few clients here plan to sign contracts by the year's end.

Read the whole thing. This seems on the surface to be a great idea for aspiring musicians; many of the ones I've taught in college have an immense amount of talent, but very little in the way of funding for their studies. And since many college musicians have already started work on the professional level while in school, it would be easy for potential investors to see tangible evidence of their abilities. There's still plenty to work on to make this a successful idea in the U.S. (among other things, it works best like an insurance pool; not just future musicians, artists and actors but future doctors and lawyers would need to join in order to keep the program well-funded), but it certainly seems like a good option for people with a lot of talent but not so much cash.